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EMC > SEC Filings for EMC > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for EMC CORP


3-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements and should also be read in conjunction with the risk factors set forth in Item 1A of Part II. The forward-looking statements do not include the potential impact of any mergers, acquisitions, divestitures, securities offerings or business combinations that may be announced or closed after the date hereof.

All dollar amounts expressed numerically in this MD&A are in millions.

Certain tables may not add up due to rounding.
INTRODUCTION

In the first quarter ended March 31, 2013, we continued to manage our business in two broad categories: EMC Information Infrastructure and VMware Virtual Infrastructure.
EMC Information Infrastructure
Our EMC Information Infrastructure business consists of three segments:
Information Storage, Information Intelligence and RSA Information Security. The objective for our EMC Information Infrastructure business is to simultaneously increase our market share, invest in the business and grow our earnings per share at a rate faster than the rate at which we grow our revenue. In the first quarter ended March 31, 2013, we continued to innovate and invest in expanding our total addressable market through internal research and development ("R&D"). Our investment in new technologies and solutions is reflected in our roadmap for the remainder of 2013, particularly in the second half, with numerous innovations, refreshes and brand-new products as well as business acquisitions. We have developed a product portfolio with customers' current and future needs in mind which will continue to evolve as the largest transformation in Information Technology ("IT") history is creating enormous opportunities in Cloud Computing, Big Data and Trust.
Cloud Computing leverages an on-demand, self-managed, virtualized infrastructure to deliver IT as a Service in a more efficient, flexible and cost-effective manner. With the rise of trends towards mobile, social, and Big Data, customers are finding greater efficiency through the available choice from cloud infrastructures where the private, public or hybrid cloud turns IT into a service that can be utilized on-demand. Accordingly, customers are increasingly recognizing that their ability to compete is tied to the efficiency, flexibility and agility of their IT operations and that transitioning to a cloud-based architecture will be a key component to their success. We believe our offerings are well-suited to capitalize on this trend as it unfolds over the next several years.
Big Data, which is a primary contributor to the pace of overall data growth, refers to the large repositories of corporate and external data, including unstructured information created by new applications (e.g. medical, entertainment, energy and geophysical), social media and other web repositories. It is triggering new approaches for our customers to derive business insight and create new opportunities to expand revenues. On April 1, 2013, we officially formed GoPivotal, Inc. ("Pivotal") with VMware, which will focus on building a platform that will accommodate Cloud Computing and Big and Fast Data Application Platforms, which are the requirements for the next generation of IT, which involves millions of applications and billions of users.
The successful transition to a model that leverages Cloud Computing and Big Data is dependent upon both the right infrastructure and the ability to build Trust into that infrastructure. Businesses require IT resources that can scale on demand, handle a variety of workloads and be trusted at all times. Accordingly, the ability for customers to have and offer Trusted IT is a valuable competitive advantage.
We believe we are well-positioned in this market to continue assisting our customers in storing, managing and unlocking the value contained within their information and to enable them to leverage our data-centric approach to security to take full advantage of Cloud Computing and Big Data.
Our go to market model, where we continue to leverage our direct sales force and services organization, as well as our channel and services partners and service providers, positions us well to help customers transition to Cloud Computing and benefit from Big Data. We offer three alternatives to help our customers transition to cloud architectures and leverage Big Data: our best of breed infrastructure components, proven infrastructure through VSPEX and converged infrastructure with Vblock from VCE Company LLC, our joint venture with Cisco, and other investors VMware and Intel. Our service provider program continues to be an important part of our strategy to get our customers to the public cloud.


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)

VMware Virtual Infrastructure
VMware's financial focus is on long-term revenue growth to generate free cash flow to fund its expansion of industry segment share and evolve its virtualization-based products for data centers, end-user devices and Cloud Computing through a combination of internal development and acquisitions. VMware expects to grow its business by building long-term relationships with its customers through the adoption of enterprise license agreements ("ELAs"). Additionally, VMware has made, and expects to continue to consider strategic business acquisitions in the future.
In January 2013, VMware announced a realignment of its strategy to refocus its resources and investments in support of three growth priorities that focus on its core opportunities as a provider of virtualization technologies that simplify IT infrastructure: the software-defined data center, the hybrid cloud and end-user computing. The software-defined data center ("SDDC") is where increasingly infrastructure is virtualized and delivered as a service, and the control of this data center is entirely automated by software. For the SDDC, VMware plans to continue to invest in the development and delivery of innovations in networking, security, storage and management as they continue to roll out and enhance the features of their vCloud Suite. For the hybrid cloud, VMware plans to focus on expanding their capabilities to deliver enterprise-class cloud services that are complementary to private clouds in order to enhance their customer's flexibility to run applications on and off premise, as they choose on a compatible, high-quality, secure and resilient hybrid cloud platform. For end-user computing, they plan to enhance their offerings to enable a virtual workspace for both existing PC environments and emerging mobile devices in a secure enterprise environment.
On a consolidated basis, our vision, strategy and roadmap as well as our continued steady execution positions us to continue to capitalize on the evolving trends of Cloud Computing, Big Data and Trust in 2013. As a result, we believe we will grow faster than the markets we serve in 2013, particularly in the second half of the year, while simultaneously investing in the business and growing earnings per share at a rate faster than the rate at which we will grow our revenue.

RESULTS OF OPERATIONS
Revenues
The following table presents total revenue by our segments:
                                         For the Three Months Ended
                                         March 31,             March 31,
                                            2013                 2012          $ Change       % Change
Information Storage               $      3,811.1             $   3,688.9     $     122.2           3.3 %
Information Intelligence Group             155.9                   145.6            10.3           7.1
RSA Information Security                   232.3                   206.5            25.8          12.5
VMware Virtual Infrastructure            1,188.1                 1,053.4           134.7          12.8
Total revenues                    $      5,387.4             $   5,094.4     $     293.0           5.8 %

Consolidated product revenues increased 1.4% to $3,111.9 for the three months ended March 31, 2013. The growth was driven by the continued demand for our portfolio of offerings to address the storage, data analysis and virtualization needs for continued information growth, particularly as customers continue to build out their own data centers to develop and support their private or public cloud infrastructures and analyze and protect the data within their data centers. However, the increase, when compared to the comparative increase in the first three months ended March 31, 2012, was lower due to customer caution regarding purchasing as a result of the uncertain economic and political environment across the U.S. and internationally.

The Information Storage segment's product revenues increased 1.1% to $2,481.0 for the three months ended March 31, 2013. Revenue from the High-end Storage business, which primarily includes revenues from EMC Symmetrix, increased 10% for the three months ended March 31, 2013, due to continued demand from customers for storage solutions with high performance, consolidation, and automation in demanding virtual data center environments, many of which are evolving into private clouds or are powering public clouds. Revenue from the Unified and Backup Recovery business declined slightly due to the challenging market environment for our Unified products which were negatively impacted by the sales of our VMAX 10-K high-end product and ongoing macro-environmental challenges internationally. Our Data Domain and Avamar purpose-built backup appliance businesses continued to grow and increase market share. Revenue from the Emerging Storage business, which primarily includes product and maintenance revenues from EMC Isilon, EMC Atmos, EMC VPLEX, EMC RecoverPoint, ASD Suites and EMC vFlash and EMC XtremIO families, increased 24% for the three months ended March 31, 2013. The scale-out file offering from EMC Isilon continues to deliver strong revenue growth in its traditional areas of strength and as it expands its presence in enterprise


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)

environments. The EMC Atmos object-storage solution exhibited strong growth. Our Big Data analytics business, Greenplum, which was contributed to Pivotal on April 1, 2013, also had strong year-over-year growth.

The VMware Virtual Infrastructure segment's product revenues increased 1.2% to $487.6 for the three months ended March 31, 2013. VMware's license revenues increased primarily due to demand for product offerings like the vCloud management and automation as customers' needs related to developing the software-defined data center, hybrid cloud, and end user computing continue. During the three months ended March 31, 2013 and 2012, ELAs comprised 29% and 22%, respectively, of total sales.

The RSA Information Security segment's product revenues increased 3.4% to $99.7 for the three months ended March 31, 2013. The increase in product revenues during the three month period was primarily attributable to increased demand for our Security Management and Compliance and Identity and Data Protection products.

The Information Intelligence Group segment's product revenues increased 20.9% to $43.6 for the three months ended March 31, 2013. The increase in product revenues was largely due to more modular, vertical-specific solutions for workflow processing which has resonated with customers.

Consolidated services revenues increased 12.3% to $2,275.4 for the three months ended March 31, 2013. The consolidated services revenues increase was primarily driven by the Information Storage and VMware Virtual Infrastructure segments' services revenues resulting from increased demand for maintenance-related services. In addition, we continue to provide expertise to customers on effective ways to enable Cloud Computing and to leverage their Big Data assets.

The Information Storage segment's services revenues increased 7.8% to $1,330.1 for the three months ended March 31, 2013. The increase in services revenues was primarily attributable to higher demand for maintenance-related services associated with a larger installed base as well as increased maintenance renewals. In addition, a growing demand for professional services as we assist with customers' transitions to cloud architectures, transforming IT infrastructures and virtualizing mission-critical applications also contributed to the increase in services revenues.

The VMware Virtual Infrastructure segment's services revenues increased 22.5% to $700.5 for the three months ended March 31, 2013. The increase in services revenues was primarily attributable to growth in VMware's software maintenance revenues which benefited from strong renewals, multi-year software maintenance contracts sold in previous periods and additional maintenance contracts sold in conjunction with new software license sales. Additionally, VMware experienced increased demand in their professional services, driven by the growth in their license sales and installed base.

The RSA Information Security segment's services revenues increased 20.5% to $132.6 for the three months ended March 31, 2013. Services revenues increased due to an increase in maintenance revenues and professional services resulting from continued demand for support from our installed base. The Information Intelligence Group segment's services revenues increased 2.6% to $112.3 for the three months ended March 31, 2013.
Consolidated revenues by geography were as follows:

                                         For the Three Months Ended
                                          March 31,            March 31,
                                             2013                2012       % Change
  United States                    $      2,831.8             $  2,633.4        7.5 %
  Europe, Middle East and Africa          1,477.3                1,464.3        0.9
  Asia Pacific and Japan                    738.0                  711.7        3.7
  Latin America, Mexico and Canada          340.4                  285.0       19.4
  Total revenues                   $      5,387.4             $  5,094.4        5.8 %

Revenues increased for the three months ended March 31, 2013 compared to the same period in 2012 in all of our geographic markets.
Changes in exchange rates negatively impacted revenue growth by 0.5% for the three months ended March 31, 2013. The impact of the change in rates was most significant in Japan and Brazil.


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        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                      RESULTS OF OPERATIONS - (Continued)

Costs and Expenses

The following table presents our costs and expenses, other income and net income
attributable to EMC Corporation:
                                            For the Three Months Ended
                                            March 31,          March 31,
                                               2013              2012          $ Change      % Change
  Cost of revenue:
  Information Storage                    $     1,718.0       $   1,629.0     $     89.0          5.5  %
  Information Intelligence Group                  56.7              55.9            0.8          1.4
  RSA Information Security                        80.4              73.2            7.2          9.8
  VMware Virtual Infrastructure                  134.5             128.2            6.3          4.9
  Corporate reconciling items                     99.9              94.9            5.0          5.3
  Total cost of revenue                        2,089.6           1,981.2          108.4          5.5
  Gross margins:
  Information Storage                          2,093.1           2,059.9           33.2          1.6
  Information Intelligence Group                  99.2              89.6            9.6         10.7
  RSA Information Security                       151.9             133.4           18.5         13.9
  VMware Virtual Infrastructure                1,053.5             925.2          128.3         13.9
  Corporate reconciling items                    (99.9 )           (94.9 )         (5.0 )        5.3
  Total gross margin                           3,297.8           3,113.2          184.6          5.9
  Operating expenses:
  Research and development(1)                    675.6             587.8           87.8         14.9
  Selling, general and administrative(2)       1,714.0           1,650.2           63.8          3.9
  Restructuring and acquisition-related
  charges                                        147.7              25.9          121.8        470.3
  Total operating expenses                     2,537.2           2,263.9          273.3         12.1
  Operating income                               760.6             849.3          (88.7 )      (10.4 )
  Investment income, interest expense
  and other expenses, net                        (69.6 )           (32.4 )        (37.2 )      114.8
  Income before income taxes                     691.0             816.9         (125.9 )      (15.4 )
  Income tax provision                            76.1             190.9         (114.8 )      (60.1 )
  Net income                                     615.0             626.0          (11.0 )       (1.8 )
  Less: Net income attributable to the
  non-controlling interest in VMware,
  Inc.                                           (34.9 )           (39.1 )          4.2        (10.7 )
  Net income attributable to EMC

Corporation $ 580.1 $ 586.8 $ (6.7 ) (1.1 )%



(1) Amount includes corporate reconciling items of $92.6 and $70.9 for the three months ended March 31, 2013 and 2012, respectively.

(2) Amount includes corporate reconciling items of $151.2 and $151.6 for the three months ended March 31, 2013 and 2012, respectively.

Gross Margins
Overall our gross margin percentages were 61.2% and 61.1% for the three months ended March 31, 2013 and 2012, respectively. The slight increase in the gross margin percentage in the first quarter of 2013 compared to 2012 was attributable to the VMware Virtual Infrastructure segment, which increased overall gross margins by 88 basis points, the Information Intelligence Group segment, which increased overall gross margins by 6 basis points, the RSA Information Security segment, which increased overall gross margins by 5 basis points, and the Information Storage segment, which decreased overall gross margins by 79 basis points. The increase in corporate reconciling items, consisting of stock-based compensation, acquisition-related intangible asset amortization and amortization of VMware's capitalized software from prior periods decreased the consolidated gross margin percentage by 10 basis points.
For segment reporting purposes, stock-based compensation, acquisition-related intangible asset amortization, amortization of VMware's capitalized software from prior periods and transition costs are recognized as corporate expenses and are not allocated among our various operating segments. Transition costs represent the incremental costs incurred to streamline our current cost


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)

structure. The increase of $5.1 in the corporate reconciling items for the three months ended March 31, 2013 compared to the same period in 2012 was attributable to a $13.3 increase in acquisition-related intangible asset amortization expense, partially offset by a $6.1 decrease in amortization of VMware's capitalized software from prior periods, $1.0 decrease in stock-based compensation expense and a $1.1 decrease in transition costs.
The gross margin percentages for the Information Storage segment were 54.9% and 55.8% for the three months ended March 31, 2013 and 2012, respectively. The decrease in gross margin percentage for the three months ended March 31, 2013 compared to the same period in 2012 was attributable to reduced product gross margins, driven by an increase in fixed costs including items such as the amortization of capitalized software, manufacturing overhead and costs incurred to support products under warranty as well as increased variable costs which include material, manufacturing and shipping costs as a result of the back-end nature of the quarter. Somewhat offsetting these was a shift in mix towards higher margin products.
The gross margin percentages for the VMware Virtual Infrastructure segment were 88.7% and 87.8% for the three months ended March 31, 2013 and 2012, respectively. The increase in gross margin percentage for the three months ended March 31, 2013 compared to the same period in 2012 was primarily attributable to improvements in services margins due to growth in maintenance revenue. The gross margin percentages for the RSA Information Security segment were 65.4% and 64.6% for the three months ended March 31, 2013 and 2012, respectively. The increase in gross margin percentage for the three months ended March 31, 2013 compared to the same period in 2012 was due to an increase in product margins resulting from an increase in sales of higher margin products as well as an increase in services margins.
The gross margin percentages for the Information Intelligence Group segment were 63.6% and 61.6% for three months ended March 31, 2013 and 2012, respectively. The increase in gross margin percentage for the three months ended March 31, 2013 compared to the same period in 2012 was attributable to an increase in sales of higher margin products as well as an increase in services margins. Research and Development
As a percentage of revenues, R&D expenses were 12.5% and 11.5% for the three months ended March 31, 2013 and 2012, respectively. R&D expenses increased $87.7 for the three months ended March 31, 2013 compared to the same period in 2012 primarily due to an increase in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions, infrastructure costs and depreciation expense. Personnel-related costs increased by $75.1, infrastructure costs increased by $7.7 and depreciation expense increased by $6.8 for the three months ended March 31, 2013 when compared to the same period in 2012.
Corporate reconciling items within R&D, which consist of stock-based compensation, intangible asset amortization and transition costs increased $21.6 for the three months ended March 31, 2013 when compared to the same period in 2012. Stock-based compensation expense increased $22.7, partially offset by a decrease in intangible asset amortization of $0.3 and a decrease in transition costs of $0.8 for the three months ended March 31, 2013.
R&D expenses within EMC's Information Infrastructure business, as a percentage of EMC's Information Infrastructure business revenues, were 9.0% and 8.4% for the three months ended March 31, 2013 and 2012, respectively. R&D expenses increased $39.3 for the three months ended March 31, 2013 primarily due to increases in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions, depreciation expense and infrastructure costs. Personnel-related costs increased by $29.2, depreciation expense increased by $5.7 and infrastructure costs increased by $5.1 for the three months ended March 31, 2013.
R&D expenses within the VMware Virtual Infrastructure business, as a percentage of VMware's revenues, were 17.3% and 17.0% for the three months ended March 31, 2013 and 2012, respectively. R&D expenses increased $26.8 for the three months ended March 31, 2013 compared to the same period in 2012 largely due to increases in personnel-related costs of $23.2 driven by incremental headcount from strategic hiring as well as increases in infrastructure costs of $2.5.


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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)

Selling, General and Administrative

As a percentage of revenues, selling, general and administrative ("SG&A") expenses were 31.8% and 32.4% for the three months ended March 31, 2013 and 2012, respectively. SG&A expenses increased by $63.8 for the three months ended March 31, 2013 compared to the same period in 2012 primarily due to increases in personnel-related costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions including variable compensation bonuses and commissions, travel costs and depreciation expense.
Personnel-related costs increased by $51.0, travel costs increased by $5.6 and depreciation expense increased by $3.5 for the three months ended March 31, 2013.

Corporate reconciling items within SG&A, which consist of stock-based compensation, intangible asset amortization and transition costs decreased $0.4 for the three months ended March 31, 2013 when compared to the same period in 2012. Stock-based compensation expense increased $7.9, intangible asset amortization decreased $1.6 and transition costs decreased $6.6 for the three months ended March 31, 2013. The increase in stock-based compensation expense was primarily due to strategic hiring and business acquisitions.

SG&A expenses within EMC's Information Infrastructure business, as a percentage of EMC's Information Infrastructure business revenues, were 26.3% and 27.1% for the three months ended March 31, 2013 and 2012, respectively. SG&A expenses increased $8.5 for the three months ended March 31, 2013 when compared to the same period in 2012 primarily due to increases in personnel-related costs and business development costs, which are expenses driven by incremental headcount from strategic hiring and business acquisitions and depreciation expense. Personnel-related costs increased by $3.1, business development costs increased by $3.3 and depreciation expense increased by $3.9 for the three months ended March 31, 2013.

SG&A expenses within the VMware Virtual Infrastructure business, as a percentage of VMware's revenues, were 38.7% and 38.4% for the three months ended March 31, 2013 and 2012, respectively. SG&A expenses increased $55.6 for the three months ended March 31, 2013 when compared to the same period in 2012 primarily due to growth in personnel-related expenses driven by incremental headcount as well as by higher commissions.
Restructuring and Acquisition-Related Charges

In the first quarter of 2013, EMC implemented restructuring programs to create further operational efficiencies which will result in a workforce reduction of 1,004 positions. The actions will impact positions around the globe covering our Information Storage, RSA Information Security and Information Intelligence Group segments, and is expected to result in a total charge of approximately $80.0, with total cash payments associated with the plan expected to be approximately $73.0. All of these actions are expected to be completed within a year of the start of each program.

In the first quarter of 2013, VMware implemented a plan to streamline its operations in order to focus its business on strategic areas it has determined . . .

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